Flexsteel Reports Residential Net Sales Down 6.4%

Furniture World Magazine

Flexsteel Industries, Inc. reported sales and earnings for its fourth quarter and fiscal year ended June 30, 2008. Net sales for the fourth quarter ended June 30, 2008 were $100.6 million compared to the prior year quarter of $114.3 million, a decrease of 12.0%. Residential net sales were $66.9 million, compared to $71.5 million, a decrease of 6.4% from the prior year quarter. Commercial net sales were $22.1 million for the quarter ended June 30, 2008, compared to $25.1 million in the prior year quarter, a decrease of 11.7%. Recreational vehicle net sales were $11.6 million for the quarter ended June 30, 2008, compared to $17.7 million, a decrease of 34.9% from the prior year quarter. Net sales for the fiscal year ended June 30, 2008 were $405.7 million compared to $425.4 million, a decrease of 4.6% from the prior fiscal year. Residential net sales were $258.1 million compared to $259.7 million in the fiscal year ended June 30, 2007. Commercial net sales were $91.5 million for the fiscal year ended June 30, 2008, a decrease of 8.1% from the fiscal year ended June 30, 2007. Recreational vehicle net sales were $56.1 million for the fiscal year ended June 30, 2008, a decrease of 15.2% from the fiscal year ended June 30, 2007. Net income for the quarter ended June 30, 2008 was $0.3 million or $0.05 per share. Net income for the quarter ended June 30, 2007 was $5.8 million or $0.89 per share. Financial results for the prior year quarter were favorably impacted by two significant non-recurring events. The Company sold a commercial property, which resulted in a pre-tax gain of approximately $4.0 million, or $0.37 per share after tax. This gain is reported as “Gain on sale of capital assets.” The Company also realized a non-taxable gain on life insurance of $0.5 million, or $0.08 per share. This gain is included in “Interest and other income.” Excluding these items, net income for the quarter ended June 30, 2007 was $2.8 million, or $0.44 per share. Net income for the fiscal year ended June 30, 2008 was $4.2 million or $0.64 per share compared to $9.3 million or $1.42 per share in the prior fiscal year. Results for the prior fiscal year include the two non-recurring items listed above and the gain on the sale of vacant land, which resulted in a pre-tax gain of approximately $0.4 million, or $0.04 per share after tax. This gain is also reported as “Gain on sale of capital assets” on the attached income statement. Excluding these three items net income for the year ended June 30, 2007 was $6.1 million, or $0.93 per share. The information regarding non-recurring items is non-GAAP disclosure. Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial performance measures prepared in accordance with GAAP. We believe this information is relevant to our investors due to the significance of these items on net income and earnings per share and have included a table in the financial statements demonstrating the impact on earnings. Gross margin for the quarter ended June 30, 2008 was 18.5% compared to 19.7% in the prior year quarter. This decrease is primarily due to the impact of cost increases on margins and lower absorption of fixed costs. Gross margin was 19.3% and 19.1% for the fiscal years ended June 30, 2008 and 2007, respectively. Selling, general and administrative expenses were 17.9% and 15.8% of net sales for the quarters ended June 30, 2008 and 2007, respectively. For the fiscal years ended June 30, 2008 and 2007, selling, general and administrative expenses were 17.5% and 16.7%, respectively. This percentage increase in selling, general and administrative expenses for the current quarter and on a year-to-date basis in comparison to the prior year periods is due primarily to higher marketing and sales support expenses and higher bad debt expenses. All earnings per share amounts are on a diluted basis. Working capital (current assets less current liabilities) at June 30, 2008 was $100.9 million. Net cash provided by operating activities was $8.7 million and $10.3 million for the fiscal years ended June 30, 2008 and 2007, respectively. The fluctuations in net cash provided by operating activities were primarily the result of changes in net income, changes in inventory and accounts payable related to sourcing of finished product and changes in accounts receivable due to sales volume and collection patterns. Capital expenditures, primarily for manufacturing equipment, were $1.2 million during the fiscal year 2008. Depreciation and amortization expense was $4.4 million and $5.3 million for the fiscal years ended June 30, 2008 and 2007, respectively. The Company expects that capital expenditures will be approximately $3.0 million in fiscal year 2009. On September 2, 2008 we filed a current report on Form 8-K disclosing our determination that the previously filed consolidated financial statements and other financial information and the related reports of independent registered public accounting firm in our annual reports on Form 10-K for the fiscal years ended June 30, 2007, 2006, 2005 and 2004 and our quarterly reports on Form 10-Q for the previously mentioned fiscal years and the quarters ended March 31, 2008, December 31, 2007 and September 30, 2007 can no longer be relied upon and should be restated due to errors in the consolidated financial statements. In that report we described the background of the error and the amounts involved for each of the fiscal years and the current fiscal year quarters. We disclosed that there were no changes to the previously issued Consolidated Statement of Income for the fiscal years ended June 30, 2007 and 2006 and the quarters ended March 31, 2008, December 31, 2007 and September 30, 2007. We also reported a material weakness in our internal control over financial reporting related to the design and operating effectiveness of controls over the reconciliation of accounts payable records to the general ledger at a material consolidated subsidiary. The actions we have taken and intend to take along with the testing of the remediation efforts were also included in the Form 8-K report. Outlook The fiscal year ended June 30, 2008 began well with the first two quarters showing improved earnings over fiscal year 2007 on only slightly lower net sales. Beginning in the third fiscal quarter net sales dropped more rapidly, and although net earnings were only about 55% of the prior year quarterly amount, our net income for the nine-months was still ahead of the prior year nine-month total. The fourth quarter 12% decrease in net sales hampered the ability to absorb fixed costs and that, combined with additional bad debt and selling expenses, contributed negatively to fiscal year 2008 results. Normally, at least one of the markets in which we sell products is doing well. However, as can be seen from the fourth quarter information presented above, residential net sales were off 6%, commercial net sales were down 12%, and recreational vehicle seating net sales were down 35%. We do not believe that we are losing market share in these categories. The U.S. economy, where most of our products are sold, has been greatly impacted by the credit crisis in the home mortgage sector, a fall in the value of the U.S. dollar versus most other major currencies, volatile high-cost fuel, increasing food prices and a changing political landscape. These factors have contributed to the lowest consumer confidence levels since 1981. We have been negatively impacted by price increases in the raw materials and component parts, such as steel, poly foam and fabrics, as well as increases in the cost to transport those materials to our manufacturing facilities and products to our customers. Our overseas manufacturers have also increased prices and the cost to transport those products to the U.S. has increased with the price of fuel. We see no near term improvement in operating conditions. This year Flexsteel Industries, Inc. will complete it’s 115th year doing business in the furniture industry. While we have seen challenging business conditions before, they are never comfortable or reassuring to our shareholders. In response to these challenges, we have: implemented price increases to offset cost increases where possible, commenced the closing of two manufacturing operations, Lancaster, PA and New Paris, IN, to more closely match our manufacturing capacity with our expected demand for residential and recreational vehicle seating products and we anticipate annual pre-tax savings in the range of $3.5 million to $4.0 million from this manufacturing consolidation, focused attention on our credit risk exposure, maintained a close relationship with our customers to offer products and services they need to operate effectively and profitability, and continued to focus on profitability and cash flow over top line growth to maintain a strong balance sheet. While we expect that current business conditions will persist for most, if not all, of fiscal year 2009, we remain optimistic that our strategy of a wide range of quality product offerings and price points to the residential, recreational vehicle and commercial markets combined with our conservative approach to business will be rewarded. About Flexsteel: Flexsteel Industries, Inc. is headquartered in Dubuque, Iowa, and was incorporated in 1929. Flexsteel is a designer, manufacturer, importer and marketer of quality upholstered and wood furniture for residential, recreational vehicle, office, hospitality and healthcare markets. All products are distributed nationally.